Both PoS and DPoS are used as an alternative to the Proof of Work consensus algorithm, since a PoW system requires, by design, lots of external resources. The Proof of Work algorithm makes use of a large amount of computational work in order to secure an immutable, decentralized and transparent distributed ledger. Contrarily, PoS and DPoS require fewer resources and are, by design, more sustainable and eco-friendly. To understand how Delegated Proof of Stake works, one must first grasp the basics of the Proof of Work and Proof of Stake algorithms that preceded it.
Most cryptocurrency systems run on top of a distributed ledger called blockchain and the Proof of Work was the first consensus algorithm to be used. It was implemented as a core component of the Bitcoin protocol, responsible for generating new blocks and maintaining the network secure (through the process of mining). Bitcoin was proposed as an alternative to the traditional global monetary system, which is centralized and inefficient. PoW introduced a viable consensus protocol that made money transmittance headed by a central authority unnecessary. It provided real-time decentralized payment settlements on a peer-to-peer economic network, removing the need for intermediaries and reducing the overall transaction cost.
Along with other types of nodes, a Proof of Work system is maintained by a network of mining nodes, which make use of specialized hardware (ASICs) to try and solve complex cryptographic problems. On average, a new block is mined every 10 minutes. The miner is only able to add a new block into the blockchain if he manages to find the solution for that block. In other words, a miner is only able to do so after completing a proof of work, which in turn rewards him with newly created coins and all transaction fees of that specific block. Nevertheless, this comes at a high cost because it requires a lot of energy and failed attempts. Moreover, the ASIC hardware is quite expensive.
Beyond the effort to maintain the system, there are lingering questions to the extent a PoW system can be applied - especially in regards to scalability (very limited amount of transactions per second). However, PoW blockchains are considered the most secure and reliable and remain the standard for a fault-tolerance solution.
The Proof of Stake consensus algorithm is the most common alternative to Proof of Work. PoS systems were designed to solve some of the inefficiencies and emerging problems that commonly arise on PoW-based blockchains. It specifically addresses the costs associated with PoW mining (power consumption and hardware). Basically, a Proof of Stake blockchain is secured in a deterministic way. There is no mining in these systems and the validation of new blocks is dependent on the number of coins being staked. The more staking coins a person holds, the higher the chances of being picked as a block validator (also known as minter or forger).
While PoW systems rely on external investments (power consumption and hardware), a Proof of Stake blockchain is secured through an internal investment (the cryptocurrency itself).
Additionally, PoS systems make attacking a blockchain more costly, since a successful attack would require a ownership of at least 51% of the total existing coins. Failed attacks would result in huge financial losses. Despite the upsides and convincing arguments in favor of PoS, such systems are still in the early stages and have yet to be tested on larger scales.
The Delegated Proof of Stake (DPoS) consensus algorithm was developed by Daniel Larimer, in 2014. Bitshares, Steem, Ark, and Lisk are some of the cryptocurrency projects that make use of DPoS consensus algorithm.
A DPoS-based blockchain counts with a voting system where stakeholders outsource their work to a third-party. In other words, they are able to vote for a few delegates that will secure the network on their behalf. The delegates may also be referred to as witnesses and they are responsible for achieving consensus during the generation and validation of new blocks. The voting power is proportional to the number of coins each user holds. The voting system varies from project to project, but in general, each delegate presents an individual proposal when asking for votes. Usually, the rewards collected by the delegates are proportionally shared with their respective electors.
Therefore, the DPoS algorithm creates a voting system that is directly dependent on the delegates’ reputation. If an elected node misbehaves or does not work efficiently, it will be quickly expelled and replaced by another one.
In regards to performance, DPoS blockchains are more scalable, being able to process more transactions per second (TPS), when compared to PoW and PoS.
While PoS and DPoS are similar in the sense of stakeholding, DPoS presents a novel democratic voting system, by which block producers are elected. Since a DPoS system is maintained by the voters, the delegates are motivated to be honest and efficient or they get voted out. In addition, DPoS blockchains tend to be faster in terms of transactions per second than the PoS ones.
Where PoS attempts to solve the faults of PoW, DPoS looks to streamline the block production process. For that reason, DPoS systems are capable of quickly processing larger amounts of blockchain transactions. Now, DPoS is not used in the same way as PoW or PoS. PoW is still considered the most secure consensus algorithm, and as such, is where most money transmittance occurs. PoS is faster than PoW and potentially has more use cases. DPoS limits the use of staking to the election of block producers. Its actual block production is predetermined in contrast to the competition-based system of PoW. Every witness gets a turn at block production. Some claim that DPoS should be considered a Proof of Authority system.
DPoS differs substantially from PoW and even PoS. Its incorporation of stakeholder voting serves as a means for deciding and motivating honest and efficient delegates (or witnesses). However, the actual block production is quite different from PoS systems and, in most cases, present a higher performance in terms of transactions per second.